First: It notes the rising awareness that Gold, while imperfect as a hedge for any specific risk (be it inflation, war, bank failures etc), provides umbrella coverage from almost all man-made risks. As true uncertainty rises, Gold’s qualities rise and shine in the public awareness. Wall Street’s Frankenstein-like risk products  keep missing the mark, pushing Gold into a Goldilocks phase of ownership. It is "just right" in these times. To that point:

"There are very few liquid assets that perform well when markets are in risk-off mode. Govvies are not a consistent hedge because of the changing nature of inflation (see more below), while currencies (JPY, CHF, USD), are vulnerable to local issues"

"Gold hasn’t decoupled from yields and the dollar, but the beta has decreased. While a gap has opened up, this does not mean the relationship has broken down. The negative correlation of both pairs has become more negative than the historical average"

When "they" get enough Gold, these correlations will probably reassert themselves again by filling most of the gap they mentioned. But until then, betting on complete convergence is a dangerous game. This is a good report.

GOLD: THE ‘EVERYTHING’ HEDGE?

by Skylar Montgomery Koning, Andrea Cicione for TS Lombard

◼ Gold is vulnerable in the near term as the absolute level of yields remains high and the market has already priced in large cuts; however, the structural case is strong

◼ There are limited hedging options during the transition to an environment of increased economic uncertainty and geopolitical risk, with 60/40 under pressure

Do commodities know something the rest of the market doesn’t?

During the “everything” rally, commodities have shown the clearest sign of concern about the global growth slowdown. Indeed, gold had broken out to an all-time high of above 2070$/oz, having seemingly decoupled from its fundamental drivers as it prices in rising global risk/uncertainty (see here for more on the rest of the commodity complex). Moreover, gold has been well behaved despite the combination of contango in futures and elevated USD funding costs.

A Fed orchestrated soft-landing may not be all it's been cracked up to be for Gold...

Gold has a large gap to close with yields and the dollar on the downside.

Gold is essentially a zero-coupon fiat currency of limited supply. This means it has a negative correlation to the dollar; as the price of gold in other currencies increases under an appreciating dollar, the demand for gold decreases. It also tends to rally when yields fall and when the stock of negative yielding debt increases (i.e., it becomes more attractive when there are fewer high-coupon alternatives). However, gold seemingly has a gap to close, with the downside based on these drivers (see charts below).

Gold hasn’t decoupled from yields and the dollar, but the beta has decreased.

While a gap has opened up, this does not mean the relationship has broken down. The negative correlation of both pairs has become more negative than the historical average (i.e., yields and the dollar are moving with gold more than the historical norm – see charts ).